Economy Growing Despite Housing, Autos

The economy snapped out of a sluggish spell and grew at a faster-than-expected 3.5 percent pace in the final quarter of last year as consumers ratcheted up spending despite a painful housing slump.

The fresh snapshot of business activity, released by the Commerce Department Wednesday, underscored the resilience of the economy; it has managed to keep on moving despite the ill effects of the residential real-estate bust and an ailing automotive sector.

The economy's performance in the October-to-December quarter, which followed two quarters of rather listless activity, exceeded analysts' forecasts for a 3 percent growth rate.

The economy opened 2006 on a strong note, growing at a 5.6 percent pace, the fastest spurt in 2½ years. But it lost steam during the spring and late summer. It grew at a 2.6 percent pace in the second quarter and then a weaker 2 percent pace in the third quarter. The fourth-quarter's rebound ended the year on a positive note.

For all of 2006, the gross domestic product (GDP) increased by 3.4 percent. That was an improvement from a 3.2 percent showing in 2005 and was the best performance in two years.

That's even more impressive considering the economy was hit by the housing slump. Investment in home building for all of last year was slashed by 4.2 percent, the most in 15 years.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic standing.

"Housing and autos hit the economy with their best punch, and the economy is still standing. It is dancing," said Stuart Hoffman, chief economist at PNC Financial Services Group.

President Bush, who had a trip to New York scheduled Wednesday to discuss the economy, was certain to point to the GDP figures as evidence that his policies are working and benefiting most Americans. But Democrats, now in control of Congress for the first time in a dozen years, counter that economic inequality is widening and that it's harder for America's middle class to get ahead.

An AP-Ipsos poll in early January found that 55 percent of Americans disapproved of the president's handling of the economy, while 43 percent approved.

In other economic news, employers' costs to hire and retain workers moderated, which could ease concerns about the development of inflation pressures. Wages and benefits rose 0.8 percent in the fourth quarter, down from a 1 percent rise in the third quarter, the Labor Department reported.

Spending on construction projects around the country dropped 0.4 percent in December, after edging up in November, mostly reflecting fallout from the housing slump, the Commerce Department said in another report.

In the GDP report, consumers spent more freely in the fourth quarter, a major factor behind the rebound in overall economic activity. Consumer spending grew at a 4.4 percent annual rate, up from a 2.8 percent pace in the third quarter and the strongest since the opening quarter of 2006.

An improvement in the nation's trade picture helped by stronger U.S. export growth also was a factor in the overall GDP boost.

More brisk government spending also helped the fourth-quarter GDP. Government spending increased at a 3.7 percent pace in the final quarter, up from a 1.7 percent growth rate in the third quarter. Federal spending on national defense rose at a rate of 11.9 percent in the fourth quarter, the most since the spring of 2003, when the country went to war with Iraq.

All those positive contributions to GDP helped to blunt some negative forces.

Investment in home building during the fourth quarter plunged at a rate of 19.2 percent, even worse than the 18.7 percent drop in the prior quarter. Both were the worst drops in 15 years.

The drop in residential building in the fourth quarter shaved 1.16 percentage points off GDP. In the third quarter, it sliced a bigger 1.20 percentage point off of overall economic growth. That led to hope that the damage to the economy from the housing slump might be easing a bit.

In the troubled automotive sector, a pullback in car and truck production shaved 1.17 percentage points off fourth-quarter GDP.

Businesses, meanwhile, trimmed investment in equipment and software. They also didn't invest as much in building their inventories as they had in the previous quarter.

An inflation gauge tied to the GDP report showed that core prices — excluding food and energy — rose at a rate of 2.1 percent in the final quarter of last year, down from a 2.2 percent pace in the third quarter.

Even with the slight improvement, underlying inflation is running higher than the Federal Reserve would like. For all of 2006, core inflation rose by 2.2 percent, up from 2.1 percent in 2005.

The Federal Reserve, wrapping up a two-day meeting Wednesday, is widely expected to hold a key interest rate steady at 5.25 percent. The Fed has left rates alone since August, following a two-year stretch of rate increases, the longest in Fed history. Economists believe the Fed is on course to achieve its goal of slowing the economy sufficiently to thwart inflation but not so much as seriously hurt economic activity.